Whenever I ask a potential client how much money are they spending on employee compensation, why do they always look at me with a blank stare? Is it because the question is unique? Perhaps no one has ever asked them that question before. These are people who are running a business, for goodness sake!
So I stare back at them until I get an answer. What do they usually say? They give me the merit increase, or general adjustment or budgeted payroll rise percentage. Unless prompted by more probing questions it is fairly common for senior managers to consider their compensation expense as an "annual" cost of business.
Which means that when it comes to the matter of monitoring or controlling compensation costs the "pool" of money under discussion is only the annual budget.
However I would submit to you that every dollar spent for employee labor is a compensation expense. If you accept that premise, then a company's labor costs balloon to over 50% of their revenue (not including benefits). In that environment the cost of annual pay rises pails in comparison.
When I ask the potential client whether their compensation program (or Total Rewards for that matter) is working, I usually get served back a befuddled look. Eventually the talk will turn to turnover, as if somehow that percentage (if being used as a metric in the first place) has a 1:1 correlation to compensation program success.
It doesn't.
What I'm saying here is that senior managers commonly are ill-equipped to understand the dynamics of their compensation costs, never mind monitor and control them. After all, brand new managers (without the benefit of any managerial training) are routinely given authority to spend the company's money (hiring, promotion, pay rises). Often enough those new managers don't make decisions in the best interest of the company, but more often based on subjective emotions, a desire to be liked, an exercise in personal power, or for a host of other reasons that may or may not relate to actual individual job performance.
And the net result of these "decisions" is the rising cost of running the business - in the form of runaway payroll compensation costs.
This is a huge, yet thankfully avoidable problem. But you won't get management to face the challenge until they understand what constitutes the employee cost of operating the business - and how to control that expense.